Since the passing of the cooperative insurance regulations of 2003, which provided the basis for Takaful companies to operate in the kingdom, the insurance and Takaful industry in Saudi Arabia has seen a flourish of activity in recent years and largely resisted the after-effects of the global recession.
This is primarily due to the strong domestic funding base offered by the privileged position of Saudi nationals, the majority of whom enjoy high investment potential compared to the rest of the GCC; and a mandatory policy of compulsory insurance for registered foreign workers.
Prior to 2003, the insurance sector was largely unregulated as conventional insurance was deemed impermissible under Shariah and the only coverage offered was through a monopolized state-run cooperative.
This cooperative system has had a lasting effect in that no specific Takaful act currently exists and as such, Takaful operators are only subject to the aforementioned law with no regulatory framework.
Takaful is further impeded by a lack of guidance from the Saudi Arabian Monetary Agency (SAMA) which, having offered strict guidelines on product development and Shariah compliance, has had limited impact on the operational standards and procedures of Takaful companies. Overseas entities wishing to enter the Saudi market must do so through highly restrictive partnership agreements, which place numerous barriers on their activities and product suites.
The future outlook of the Saudi Arabian insurance sector is however highly optimistic as there is a strong inherent growth potential within the market. Ernst & Young (E&Y) back up this assertion, claiming that Saudi Arabia is the largest Takaful market in the GCC, seeing nearly US$8.9 billion in contributions over the course of 2010, followed by Malaysia and the UAE. However, Saudi Arabia is expected to grow at a faster rate because the premiums paid by the insured are considered donations not premiums.
Saudi Arabia’s Takaful market has gone from strength to strength due to the continued rollout of compulsory medical insurance. More than half of the kingdom’s population of 29.2 million are deemed to be upper middle class, and with around 60% of the population below retirement age, the encouraging demographics are likely to present further growth potential as the population ages and looks increasingly towards their savings and investment status.
Health insurance has emerged as one of the fastest growing segments in the Saudi Arabian insurance sector. With a 53% share of total insurance premiums during 2010, health insurance has become a key growth driver for the overall market, while the share of gross health insurance is likely to reach around 59% by the end of 2014. The general insurance sector, meanwhile, is expected to grow at a compound annual growth rate (CAGR) of around 12% between 2011 and 2014.
The motor insurance segment is also reportedly projected to grow at a significant CAGR of 30% between 2010 and 2012. This fast growth rate will be achieved on the back of increased promotional strategies deployed by government in line with the compulsory rollout of required motor insurance.
The future outlook of the Saudi Arabian insurance sector is highly optimistic as there is strong inherent growth potential in all market sectors, with general insurance providing particularly strong growth figures. Factors such as low penetration, strong government support, and rising awareness levels are likely to propagate the number of people opting for insurance plans. Takaful insurance, in such a scenario, will play a vital role.